What is a payment bond in construction?
A payment bond is a surety bond the prime contractor provides that guarantees payment to the subcontractors, suppliers, and laborers on a project. If the contractor does not pay them, they can claim against the bond. It replaces lien rights on public work, and federal construction contracts over $150,000 require one under FAR 28.102-1.
A payment bond is a three-party promise. The contractor (the principal) promises to pay its subs and suppliers. A surety guarantees that promise. The people who furnish labor and material are the protected parties. If the contractor does not pay, an unpaid sub or supplier can make a claim against the bond and the surety pays valid claims, then seeks repayment from the contractor.
Payment bonds matter most on public projects, where a mechanics lien usually cannot be filed against government property. The bond replaces the lien as the sub's security.
Federal rules under the Miller Act
For federal construction, the Miller Act sets the basic rules. Under 40 U.S.C. 3131, a contractor awarded a federal construction contract of more than $100,000 must furnish a performance bond and a payment bond. The payment bond generally equals the total amount payable under the contract and can never be less than the performance bond. The FAR now sets the working threshold higher, as shown below, so always check the current regulation.
| Rule | Requirement | Source |
|---|---|---|
| Bond threshold | Construction contracts exceeding $150,000 | FAR 28.102-1 |
| Smaller contracts | Over $35,000 up to $150,000: payment protection the contracting officer selects, such as a bond or alternatives | FAR 28.102-1 |
| Bond amount | 100 percent of the original contract price, plus 100 percent of any increase, unless the contracting officer makes a written finding it is impractical | FAR 28.102-2 |
| Notice for second-tier claimants | Written notice to the prime within 90 days after the last labor or material | 40 U.S.C. 3133 |
| Lawsuit deadline | No later than one year after the last labor or material | 40 U.S.C. 3133 |
Claimants with a direct contract with the prime can sue if not paid in full within 90 days after their last work. Claimants who contracted with a sub, but not with the prime, must first give the prime written notice within 90 days. Suit is filed in federal court in the district where the contract was performed. States have their own versions, often called Little Miller Acts, for state and local public work.
How a bond claim works on a real job
Say a rebar supplier sells $54,000 of material to a concrete sub on a federal courthouse renovation. The sub goes out of business after paying $12,000. The supplier has no contract with the prime, so it is a second-tier claimant. Its last delivery was March 3. It sends written notice to the prime, by a method that proves delivery, before the 90-day deadline in early June. The prime's surety reviews the claim, asks for invoices and delivery tickets, and pays the $42,000 balance.
Common mistakes
- Missing the 90-day notice because the supplier was waiting for the sub to pay.
- Counting from the wrong date. Warranty or punch work may not extend the last day of furnishing.
- Not getting a copy of the bond at the start. On public jobs, ask the GC or the agency for it.
- Assuming tiers below second tier are covered. Federal bond coverage stops at certain tiers.
- Letting the one-year suit deadline pass while negotiating with the surety.
Related terms
The payment bond is almost always paired with a performance bond. Related terms include bid bond, bonding company, and bond capacity. For more, see how the Miller Act protects subcontractors. Smart Business Automator tracks last-furnished dates so bond notice deadlines are visible. See public works contractor automation.
Frequently asked questions
Who does a payment bond protect?
Subcontractors, suppliers, and laborers who furnish labor or material for the project. It does not protect the owner against poor work; that is the performance bond.
When is a payment bond required on federal jobs?
On federal construction contracts exceeding $150,000 under FAR 28.102-1. Contracts over $35,000 up to $150,000 require payment protection the contracting officer selects.
How long do I have to make a Miller Act claim?
Second-tier claimants must give written notice to the prime within 90 days of the last labor or material, and any suit must be filed within one year of that date.
Are payment bonds required on private jobs?
Only if the owner or lender requires one in the contract. Many private owners do on larger projects.
